FTC squelches Ethernet patent squatter's price hike

The US Federal Trade Commission is barring a patent-squatting firm from raising its royalty rates for a now-standard Ethernet technology.

On Wednesday, the agency settled a complaint against Negotiated Data Solutions (N-Data) which the FTC claims was demanding unfair royalties for licensing its patents

The FTC accused the firm of reneging on a licensing commitment to the electronics standard organization, the IEEE, that the patent license would be sold for a one-time royalty of $1,000 per license.

N-Data had originally acquired the technology from National Semiconductor Corp. According to the FTC, N-Data purchased the patent knowing the technology had been made a standard for Ethernet gear because of the small licensing price tag.

By deciding to jack up the fee to amounts "far in excess" of the original agreement, the commission said N-Data was "thereby able to increase the price of an Ethernet technology used by almost every American consumer who owns a computer."

In 1993, the IEEE had authorized the 802.3 Working Group to develop a new standard for 100Mb/s Ethernet. Among its goals was to make the new equipment compatible with older 10Mb/s Ethernet gear. That meant finding a suitable auto-detection technology to let devices configure themselves to the best available speed.

National Semiconductor, a company that had employees working as active participants in the 802.3 Working Group, proposed its "NWay" technology for the task. To stave off several alternatives also being considered by the group, National sweetened the deal by announcing NWay tech would be licensed to network gear makers for a one-time fee of only $1,000.

Based heavily on National's $1,000 promise, the 802.3 Working group took its offer. The technology became a standard in Ethernet gear. By 2001, companies were locked into using NWay, with no commercially viable alternative autonegotiation technology for Ethernet available.

The license was sold to Vertical Networks in 1998, which began began to demand larger patent license fees. Vertical estimated that more than 70 per cent of the world's Ethernet port shipments used NWay patents. N-Data was later spun off from Vertical in 2003.

As a result of the FTC's 3-2 decision, N-Data is prohibited from enforcing the patents unless it has first offered the patent license based on the terms offered in 1994.

"N-Data is disappointed that the FTC decided to take this unnecessary and unprecedented action," the company said. "N-Data and its predecessor, Vertical Networks have at all times acted in good faith in their dealings with the IEEE and with the companies to whom licenses were offered."

FTC Chairman Deborah Majoras, who wrote the dissenting opinion for the organization, said the majority was not able to establish that there was unfair method of competition. In addition, the IEEE appeared to have allowed some changes to the licensing terms in the past. She also believes the FTC doesn't need to fight for established computer manufacturers that are capable of sticking up for themselves.

"The novel use of our consumer protection authority to protect large corporate members of a standard-setting organization is insupportable," she said. ®